Bin Buying?

By

Alan Abelson

May 27, 2002 12:01 a.m. ET

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Man, he's back! and this time he's long.

We're talking about Osama bin Laden and his return to the stock market.

It figures, of course. With the U.S. bombing to sheikdom come those cool caves in Afghanistan where he used to keep his stash, and the relentless crackdown on the phony fronts that were so handy for funneling it to wannabe martyrs around the globe, what Osama hasn't bin laden with lately is ready cash.

So he decides to replenish his coffers by stocking up on Dow and S&P futures. (Last time, the satanic Saudi made a killing, so the story ran, by going short in advance of 9/11.) And, displaying real Street smarts, he floats a rumor on Wednesday -- which, alas, proved greatly exaggerated -- that he's dead. (We can hardly wait for the video showing him all chuckles as he tells his partner in crime, that chubby one-eyed Mullah, how he made all that moola.)

Gotta give the devil his due. Buying into a falling stock market late in the session, feeding the rumor mills with the one piece of news sure to send prices higher -- the report of his own demise -- and then folding his tent and cashing out stacks up as a first-rate job of rigging.

There was a certain hesitancy among traders in responding to the rumor because they couldn't immediately place the name. Which isn't too surprising, really. Uttering it out loud has been labeled strictly unpatriotic by Washington, since it's apt to remind the citizenry that the oily rogue has given us the slip and no one, least of all the people who spend $30 billion a year of the taxpayers' money doing "intelligence" (imagine the tab they could run up if they were doing "stupidity"), has the faintest clue as to which rock he's hiding under.

Perhaps we shouldn't be too hard on the poor lads and lassies in outfits like the FBI charged with the awesome task of rooting out terrorists. For, it turns out, Wall Street, by distracting them from their relentless pursuit, must share some of the blame for their failure to bring to ground nasties like bin Laden.

That is the purport of an indictment handed down last week in federal court in the Eastern District of New York. It charged a small pack of predatory short sellers (or is that redundant?) led by one Anthony Elgindy, also known as Tony Elgindy and Anthony Pacific, with getting confidential info from Justice Department databases and then bad-mouthing some Bulletin Board beauties on the Web, first, of course, taking pains to sell the stock of those companies short.

But what else is new is that the confidential info with which the short sellers carried out their dirty dealings allegedly was supplied by a couple of FBI agents, one of whom quit the Bureau to join Elgindy & Co. full-time.

Admittedly, providing classified information to short-sellers is a whole different order of sleaze from providing classified information to the Russians, as that infamous FBI creep Hanssen did. Still, beyond an obvious character flaw, the FBI fellow's trafficking with short-sellers is evidence of an appalling lack of taste. We mean, didn't he ever ask himself whether he'd like his sister to marry one of them?

The point, in any case, is that it's tough enough to track down a nut sending anthrax through the mail or preventing a fundamentalist crazy from blowing up the Brooklyn Bridge, let alone nail the wily bin Laden. But it's infinitely tougher if, while engaged in such vital endeavors, your mind is really on when some cheesy little stock selling for a buck will finally hit a quarter.

Any serious scholar of the subject will attest that the nation's intelligence operations began going to pot when Bill Casey headed the CIA and spent at least as much time speculating in stocks as he did speculating on what the Bolshies were up to. And, if it emerges that bubble mania encompassed a wide swath of FBI personnel and not just a stray pair of agents, that pretty much would clear up the mystery of why the Bureau in recent years has been prey to an epidemic of egregious gaffes.

To its credit, the stock market shook off the truly depressing news that Osama was still among the quick and, after moping around until the last hour, managed another gain on Thursday. (Friday's dispirited action doesn't count since there was the traditional pre-Memorial Day rush out of the trenches by Street folk to be first in line at the barbecue.) What helped stocks gain a little traction in the penultimate session were supposedly bullish economic reports on durable goods and employment.

The operative word in that last sentence is "supposedly." For, in truth, the "good news" loses much of its luster under closer scrutiny. The "improvement" on the labor front turned out to be a decline of 9,000 in the weekly total of new claims for unemployment insurance. But since the total of such claims remained a sizable cut above 400,000, and the number of idled workers rose 29,000 to 3.87 million, the numbers hardly merit even a muted hurrah.

Nor, we submit, is April's 1.1% jump in new orders for durable goods deserving of the hearty cheers it elicited. The increase was a lot better than the brokerage-firm hired hands who keep tabs on the economy anticipated (they forecast a 0.4% rise), but so what? This a statistic that can swing wildly from month to month and is remarkably immune to accurate consensus estimates. Much less noted, though we suspect more significant, is that unfilled orders were off.

In other words, what firmed up stocks from their early-in-the-week wobbles was nearly as dubious as the lamentably unfounded rumors of bin Laden's passing.

Except for the occasional burst upward and the odd tumble, what has been noteworthy about the market lo, these many weeks has been its irresoluteness. In part, this desultory behavior reflects fears of the havoc Mr. Spitzer and Congress may wreak. In part, it's the discouraging sight of so much of Wall Street's and Corporate America's dirty linen hanging out there in broad daylight.

But we also suspect that, contrary to all the happy sounds issuing from the drum beaters and cheerleaders, the market shares our sense that what we're seeing is an okay but not great recovery. Nothing, for sure, to justify 30 times this year's earnings.

The chart that accompanies these scribblings is the handiwork of Stephanie Pomboy, who puts out a new, smart, informative and quite lively economic commentary called MacroMavens, which as its name implies, focuses on the big picture (which is what economists did before they became minutiae addicts).

What the chart makes clear, Stephanie notes, is that "the recent gains in productivity, far from being miraculous," are both cyclical and ordinary. Nor is she all that impressed by the fact that the gains persisted through the recent recession, since what distinguished the recent recession was that while corporate profits got slammed, consumption really never faltered.

Stephanie traces the hullabaloo about productivity to a certain Alan Greenspan, who more or less invented the notion of a New Economy productivity miracle as an alternative to taking unpopular action on the monetary front.

We plead guilty to committing a gross simplification of her analysis, but we think we've captured the essence of it and we found it reasonable and persuasive. Reasonable because we never bought the silly notion of a New Economy, so we couldn't very well believe a fabrication could yield a miracle. And persuasive because Alan Greenspan is, well, Alan Greenspan, the man who likes to be liked.

As it happens, Goldman Sachs's Bill Dudley, whose stuff invariably is top-drawer, last week offered his variation on the productivity theme. Bill evinces as little enthusiasm as Stephanie does, or for that matter, as we do for viewing the leap forward in productivity during the mad capital-spending spree of the Nineties as miraculous. Instead, he dubs the boom in capital investment "an overshoot," and suggests no one hold their breath waiting for a repeat.

The recent spurt in productivity growth he flat-out calls a "cyclical phenomenon," pointing out that productivity always moves up in the initial stages of an economic rebound. But, he warns, "the long-term productivity outlook has become less rather than more favorable."

And he ticks off the reasons why. To the dim prospects for a revival of a Nineties-style capital-spending boom add the switch back from tightwad to big spender by Uncle Sam, a change certain to take its toll on private investment; the trend away from free trade to bad old protectionism; and the slackening of the drive to deregulate, for which we can thank the fact that so much of the economy already has been deregulated but which also reflects the reaction to Enron et al.

What he foresees is 2% to 2&frac12;% annual growth in productivity, which, splitting the difference, would be &frac34;% higher than that averaged in the '73 to '95 stretch, but a good cut below the more exuberant gains the crowd expects.

That, says Bill, translates into something like 3%-a-year gross domestic product growth, the risk of a rise in inflation over the medium term, a weaker dollar and relatively low real interest rates. Which, he postulates, would make equities and ordinary Treasury bonds vulnerable (the former because long-term earnings growth would suffer; the latter because of the greater risk of inflation). Contrariwise, inflation-indexed Treasury bonds, or TIPS, shape up as likely winners.

The indefatigable Doug Kass points out to us an interesting and unpublicized item in
Dell Computer's
10K, released a few weeks ago. The premier computer maker is a partner, it turns out, in an off-balance-sheet partnership called Dell Financial Services. The other partner is none other than
Tyco International,
through its CIT sub that Tyco dearly wants to unload.

Dell Financial offers Dell's customers, whether of the business or consumer persuasion, financing via CIT for purchasing Dell computers. According to the 10K, the joint venture did $2.7 billion in such financing in fiscal 2002, $2.5 billion the previous year and $1.8 billion in fiscal 2000. As Doug marvels, "That's a whole lot of computers!"

Equally worth remarking is that in this partnership the partners aren't necessarily equal. All of Dell Financial's losses automatically go to CIT (read: Tyco). And the net income is split this way: 70% to Dell, 30% to CIT (read: Tyco), after the latter recoups its losses.

As Doug exclaims, this is a heap of rapidly depreciating computers to lay on Tyco/CIT, especially since Tyco/CIT takes all of the risk but is restricted to only a 30% cut of the profits.

And, Doug also notes, the Financial Accounting Standards Board's new accounting recommendations are aimed at putting entities like Dell Financial Services back on the balance sheets of its parents, i.e, Dell and Tyco.

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